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The Essentials of Successful Site Selection
by Dennis Donovan
5/1/2007

This article addresses the basics of successfully choosing the right location for office and industrial facilities. We first discuss the most salient trends influencing corporate site selection in the second half of this decade. Subsequently a structured four-phase process that should be followed, irrespective of industry, is outlined. Sample data sources for procuring requisite information on candidate locations are highlighted as well.

Trends

Today we operate in a truly global economy. Therefore, most companies have adopted a multi-shore strategy aimed at serving global markets in the most efficient, cost effective, and risk free manner. One of the first tasks facing corporate executives on location projects becomes determining how the proposed new operation fits into the company's worldwide growth strategy. This requires a keen understanding of the drivers underlying the new capital investment. Drivers include:

1. Market penetration

2. Cost reduction/containment

3. Risk minimization

4. Knowledge acquisition

Once this determination is made, the geographic focus for the location search should become clear. This could involve focus on a specific region (e.g., South America) or country (e.g., Chile). Once the strategic fit of the new entity is defined, there likely will be overarching considerations for ascertaining the ultimate location as noted below.

As we proceed into the second half of this decade, several locational dynamics are assuming primacy in the site selection decision-making equation. These include the following:

People: the key to achieving low-cost/ highest quality status. Labor shortages emerging in the U.S. and Europe. Ensuring favorable supply/quality/cost environment any where in the world important to fostering success in a new location

The above considerations are, generally speaking, the paramount criteria shaping location decisions for corporate facilities. We now turn to the process that companies should follow when siting new facilities.

Before leaving this section, another growing trend worthy of mention involves companies locating new facilities in small towns/rural areas. This is most applicable to traditional manufacturing, distribution, and back offices such as customer service centers.

Prime forces behind this trend include cost minimization, labor market dominance, and maximum assurance that the final location will be capable of sustaining advantages well into the future.

This trend is evident throughout the world. Examples include western and northern China, less economically developed countries of Eastern Europe, and off the beaten track communities in the U.S. In large measure due to labor market and cost factors, we see the trend toward locations in small towns/rural areas intensifying over the foreseeable future.

Location Decision-Making Process / Overview

A systematic process should be followed to assure certainty that the ultimately chose location will maximize potential success of the new business enterprise. If this process is assiduously adhered to, the optimal location for the subject business will emerge. The process requires that the company's project team understand the business drivers/objectives.

This understanding will then be translated into a proper weighting of locational criteria. These criteria will guide the entire decision-making process. The nutshell, they are:

Geographic search territory, initial universe of location contenders, long list of most attractive locations, ranking/scoring the long list (often ten areas), benchmark existing or other locations, selection of the shortlist

(3)

Location selection

Select the best long range location

Field based research in short listed areas, analysis of how areas differ over both near-term and long range, balancing cost and qualitative factors, selecting the optimal location

(4)

Site selection

Choose the optimal property

Evaluating properties in two or more locations, assessing real estate and incentive offerings, examining infrastructure of site/buildings, ensuring that final selection supports attainment of primary location criteria

Typically the four-phase process will require 12-24 months to complete. The most crucial elements of each phase are enumerated below

Phase One: Planning

In essence this phase entails creation of the informational building blocks that will underlie the entire study. A project team will need to be formed, consisting of several internal members and possibly an outside advisor. Importantly, it has been our experience that site selection teams should be led by an operation’s senior executive. Other cast members should be drawn from the following disciplines:

Operations
(should be team leader)

Real estate
(often functions as the team coordinator)

Human Resources

Information Technology

Logistics

Environmental

Finance

Legal

Once the team is assembled it will be necessary to generate the following:

Main business objectives to be achieved by the new facility

Location of chief competitors/do they have a built-in advantage

How the new facility fits into the company's global real estate portfolio

Business operating requirements for the proposed entity:

Staffing

Real Estate

Utilities

Transportation

Environmental

Realistic estimate for maximum size

Headcount

Site/building

Target start date

Extent of the geographic search region

Relative location criteria weighting

Task completion (milestone) timeline

Once the information gathering effort is completed, the team should prepare a summation for sign-off by top management. Subsequently, the analytical portion of the exercise begins.

Phase Two: Screening

Within the geographic search region (which could encompass a few states, the entire country, or multiple countries) a systematic process should be followed, ending up with a shortlist (generally three) of highly qualified (finalist) locations. These areas would be carried forward to the next phase of the analysis.

Screening varies somewhat for multiple vs. single country studies. For the former we often screen at the country level until a handful of the most favorable emerge. Then we rely on typically sparse published data and more importantly on trusted secondary information sources (such as country embassies/consulates, international business service firms with local offices, contacts at companies with branch operations, and inward investment agencies) to create a shortlist of localities for each country.

By contrast in the U.S. (i.e., single country study) the geographic emphasis will be at the metro or county level. And in the U.S. published data are more comprehensive and available. The first test in single country screening is to initially apply elementary criteria (e.g., population size) to define the universe of locational candidates. For instance, on a manufacturing project, this could involve all counties with a certain population threshold that are within 10 miles of an interstate highway. In a situation involving a back office, an illustration of baseline criteria could be all metro areas with a minimum population size that are no more than 60 minutes from a medium hub airport and have less than 10% of the workforce employed in financial services (typically a high wage, white collar sector).

Once the study universe is delimited, the field must be trimmed until a long list of potentially suitable locations (maybe around 10) appear. This whittling process requires desktop research to differentiate areas on pertinent factors.

Be sure that your team has agreed to any deal breakers that automatically reject any area no matter how appealing on other variables. Examples include over concentration of a specific industry employment base, under concentration of specific skillsets, higher than average union presence, absence of nonstop air service to HQ, high natural disaster risk, and lack of an available building, etc.

To launch the screening procedure, we find it efficient to first create factor categories such as population, labor force, transportation, etc. Then identify individual factors under each category (e.g., size, growth, age and diversity for population). In a spreadsheet, display the data for all contending areas. Do so in alphabetical order (by area) and rank order (high to low for each data set). Then eliminate areas falling below the midway point of the full data category (like population). Before final elimination look over those in the bottom half to see if intuitively any should be provisionally reinstated. Exhibit One illustrates typical early screening stage factors for workforce. In effect, the ‘keep and cut’ procedure is replicated for all location factor categories.

This culling initiative should eventually reduce the field to a manageable number of contenders (long list). Fortunately, there are many databases that can furnish relevant statistics by metro area or country. Examples of some of the most widely used databases appear in Exhibit Two.

At this juncture it will be necessary to prepare and send a brief questionnaire to the appropriate state and/or local economic development group. You will be seeking to gather more in-depth knowledge on each area’s operating environment (e.g., major labor market competitors) as it might impact (positively or negatively) the business unit in question. Most frequently requested information is delimited below:

All Direct labor market competitors

1. Major employers

2. New/expanding companies

3. Downsizing companies

4. Unionized firms and recent organizing activity

5. Available sites/buildings meeting stated criteria

6. Water/sewer treatment capacity (by site)

7. Electric power

Capacity

Generation

Transmission

Reliability

Cost

8. Telecommunications

Local exchange courier

Competitive local exchange carrier

Physical switching presence by carrier

9. Utility dual service by site

10. Selected tax practices/rates

11. Potential incentives

As of right (legislated)

Applicable to this project

12. Transportation

Carriers will local terminals

Licensed independent hauler

Backhaul opportunities

Class 1 RRs

Proposed new/improved limited access four-lane highways

Proposed air service improvements

13. Miscellaneous (e.g., annual # college grads by discipline, number of houses for sale by a specific price range, average commute distances from selected sites/buildings, air quality, Phase One environmental study results by site, etc.).

The above type of information needs to be synthesized and summarized. Then the long listed areas should be ranked/scored. An illustration of a factor weighting/area scoring model is shown in Exhibit Three. Typically there will be a tiering of longlist areas by composite (total) scores. Top rated areas should be good to excellent on both cost and operating environment issues. Usually, a shortlist of some three areas will be agreed upon for further and more comprehensive analysis.

Phase Three: Location Evaluation

In this phase the company’s study team conducts a first-hand investigation in the three (or possibly more) finalist (i.e., shortlisted) areas. Field itineraries can be arranged by the lead economic development organization. They will abide by confidentiality rules if requested. However, if the project is ultra sensitive, it is a good idea to have the ED group sign a confidentiality agreement.

The field team’s first visit should be limited to one or two members. The team would spend 2-3 days in each area. Principal tasks would include the following:

1. Formal orientation by the ED organization

2. Confidential interviews with similar employers

3. Facility tours of several interviewed companies

4. Confidential interviews with other pertinent entities, such as

Commercial developers

Commercial realtors

Utilities

Tax assessors

Government leaders

Permit approval reps

College placement

Personal agency

Motor carriers

5. Physical inspection of seemingly acceptable sites/buildings

(list submitted by the ED agency)

First look over statistical and map profiles of the properties

Then tour each property to see how well the site/building matches key criteria

6. Quality-of-life tours including neighborhoods for “transferees” and those likely to produce the bulk of locally hired workers

7. Request the lead ED group to generate a formal yet still preliminary (i.e., penultimate) incentives package

8. Also have the ED group get preliminary price quotes for sites and buildings (own or lease)

Post fieldwork there will be frequent follow up with the lead ED group. For instance you might need more detail on tax issues, utility infrastructure, and certainty of fast track construction.

Each location must now be assessed on how well its attributes match the company’s overriding criteria. This requires judgment on how major factors (e.g., labor costs) are likely to change (for good or bad) over time. Also beware that when analyzing factors, take into account the effective economic area – not a political boundary. For example, it is likely that over 75% of new hires would live within 30minutes of the worksite. But for qualityoflife, transferees could be willing to commute up to 60minutes. Defining proper geographic focus in the various components of the analysis is important.

Shortlisted locations will be contrasted and rated on innumerable factors. The most common are denoted below.

I. Labor market

1. Competitive demand

2. Availability

Total applicant flow

Well qualified applicant flow (ideally 3 or more to 1)

3. Quality

Business skills attainment

PC literacy

Basic problem solving

Ability to function in team

Daily absenteeism

Annual turnover

4. Wage structure by position

Start

Max

Time to reach max

5. Need for incentive compensation

6. Second/third shift staffing/premium

7. Overtime/week staffing/premium

8. Seasonal staffing

9. Unionization threat

10. Area training resources

11. Labor legislation

12. Keys to employer of choice, based on what the area’s best firms offer

Benefits

HR practices (e.g., flextime)

Compensation

Career mobility

Internal work environment

On site amenities (e.g., cafeteria, and health/fitness center)

Corporate giving/civic involvement

13. Most effective recruiting sources/methods

II. Logistics

1. Market access

2. Supplier areas

3. Highway linkage

4. Highway congestion

5. Motor carrier service

TL

LTL

Average delivery times

6. Rail service

Main line

Branch line

Service times

Car availability

7. Air service

Passengers

Cargo

Distance to airport

Airport infrastructure

Annual days (or hours) closed

8. Distance to a seaport

9. Presence of 3 PL service providers

10. Presence of other service providers (e.g., import/export brokers)

III.Real Estate

1. Site

Size (acres)

Configuration

Topography

Soil conditions

Watertable

Drainage

Vegetation

Wetlands

Floodplain

Fire insurance rating

Police/fire protection

Former use

Current use

Zoning

Nearby land use

Nearby companies

Highway access

Rail service

Utility service

Elevated water storage

Dual power/teleco feed

Specific address

Owner

Formal asking price

2. Building

Size (SF)—Gross

Rentable

Usable

Floors

Number

Size (per floor)

Column spacing

Ceiling height

Floor load bearing capacity

HVAC system

Electric power service

Telecom service

Natural gas service

Water/sewer service

Construction

Date

Materials

Previous use

Highway access

Rail service

Taxing jurisdiction

Asking price or annual report ($ per SF)

Current owner

IV. Utility infrastructure (capacity, reliability, cost)

1. Electric power

2. Natural gas

3. Water/sewer

4. Telecom

5. Co-generation

6. Alternative energy

7. Distributed energy

V. Taxation

1. Corporate income

2. Franchise

3. Property

Real

Personal

4. Sales / use

State

Local

5. Gross receipts

State

Local

6. Personal income

7. Deed recording

8. Property transfer

VI. Incentives

1. Program

2. Eligibility

3. Restrictions

4. Clawback/recapture

5. Estimated annual savings

VII. Regulation

1. Air/water

Quality

Permit approval

Time

Cost

State EPA rules that exceed Federal

2. NIMBY presence

3. Workplace

Workers’ compensation

Unemployment insurance

Hiring / firing regulation

Mandated severance

Workweek length restrictions

Sunday work restrictions

4. Tort/legal liability

5. Other (e.g., interest rate limits)

VIII. Quality-of-life

1. Cost of living index (U.S.=100)

2. Affordable housing

3. Commute times

4. Crime rates

5. Climate

6. Outdoor recreation/scenery

7. Public education

8. Private education

9. Higher education

10. Arts/culture

11. Sports/entertainment

12. Medical / health

13. Distance to a major city

14. Air quality

15. Other (e.g., downtown renaissance)

IX. Multi-year business cost forecast (actual and NPV)

1. Payroll

2. Occupancy

3. Property/casualty insurance

4. Transportation

5. Taxes

6. Other (e.g., scrap disposition)

7. Total

The comparative analysis should yield a winner (best location) and acceptable alternative (runner up). At this point the team presents conclusions/recommendations to top management. If top management approves, the team enters Phase Four of the process.

Phase Four: Site Evaluation

This is similar to the location evaluation Phase (Three). But in this phase, the team drills down on shortlisted sites/buildings. Typically the focus will be on two locations (number one and two ranked areas). Frequently the team is now expanded to include the following expertise:

1. Local legal counsel

2. Incentives negotiator

3. Commercial real estate broker

4. Architect / engineer

5. Interior design

6. Project / construction management

7. Taxation expert

Phase Four often begins by issuing a succinct request for proposal (RFP) to property owners that had attractive sites/buildings per Phase Three. The field is then narrowed to 2 or 3 properties in both locations. Formal negotiations now begin in earnest. Real estate must be coordinated with incentive negotiations.

Due diligence on sites and other selected issues (e.g., state tax law) is conducted. Typical factors addressed are:

1. Risk

2. Geophysical

3. Expansion Flexibility

4. Environmental

5. Utilities

6. Safety

7. Security

8. Appearance / Image

9. Tax

10. Incentives

11. Legal

12. Cost

Eventually one site will emerge as the best choice. Ideally this will be situated in the preferred (number one) location. If it is not, then the big picture tradeoffs (including real estate) between both areas must be weighed. Remember that ultimate success seldom comes down to a “real estate deal.” Rather, real estate should enhance a strong location from the perspective of critical operational and cost factors.

About the Author:

Dennis J. Donovan is a principal of Wadley-Donovan-Gutshaw Consulting based in Bridgewater, NJ. Both Dennis and his firm have been advising corporations on office and industrial location for over 30 years.

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